Who’s the Boss? Broader Applications of the Employer Liability Exclusion

While “Who’s the Boss” may conjure up images of Tony Danza, a retired baseball player turned housekeeper, the latest edition of the Insurance Commando Blog addresses some courts’ broader construction of standard employer liability exclusion in commercial general liability policies. The ISO’s typical employer liability exclusion bars coverage for “‘bodily injury’ to: (1) An ‘employee’ of the insured arising out of and in the course of (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured’s business; or (2) The spouse, child, parent, brother or sister of that ‘employee’ as a consequence of Paragraph (1) above.”

Traditionally, courts apply this exclusion when the injured person is an employee of the insured seeking coverage. See e.g., Truck Ins. Exch. v. BRE Properties, Inc., 119 Wash.App. 582, 81 P.3d 929 (2003). The rationale behind these decisions is based on the rule of policy construction requiring courts to give effect to each policy provision taking into account the policy as a whole. Because some exclusions refer to “an” or “any” insured versus “the” insured, courts have given effect to this distinction by more narrowly applying exclusions using the phrase “the insured.” That is, exclusions using “the insured” only apply to bar coverage as to the insured claiming coverage while exclusions using “an insured” or “any insured” more broadly bar coverage when any insured meets the criteria in the exclusion.

In additional insured claims, using “an” or “any insured” can determine coverage for employee injury claims. Consider the scenario of a general contractor tendering an additional insured claim to a subcontractor’s liability insurer after the general contractor is sued for its negligence in causing injury to an employee of a project subcontractor. Traditionally, the employer liability exclusion would not apply to bar coverage because the employee at issue was not an employee of the general contractor, who sought coverage. Recently, however, the Eleventh Circuit has been applying the exclusion to bar coverage to the general contractor in this scenario.

In Amerisure Insurance Co. v. Orange and Blue Construction, Inc., 545 F. App’x 851 (11th Cir. 2013), the Eleventh Circuit held in an unpublished decision that the employer’s liability exclusion applied to preclude coverage in Florida for a general contractor-additional insured, under a policy issued to a subcontractor, for an injury sustained by an employee of another subcontractor who was three tiers removed from the general contractor.

How you ask? Although the general contractor argued that the exclusion was inapplicable for the reasons set forth above, the Eleventh Circuit held that “[a]lthough [the injured party] may not have been one of [the general contractor’s] employees in the traditional sense, [he] was a ‘statutory employee’ of the [general contractor] for purposes of worker’s compensation law. . .Because [the injured party] was one of the [general contractor’s] statutory employees and was injured during the course of his employment, Amerisure had no duty to defend [the general contractor]. . .” The Eleventh Circuit subsequently applied the same rule in barring coverage in a published decision. Estate of Becker v. Mid-Continent Ins. Co., No. 11-10170 (11th Cir. Apr. 24, 2014). The Eleventh Circuit’s decision in those cases was based on Florida’s Workers Compensation statute, which specifically provides that a subcontractor’s employee shall be deemed an employee of the general contractor if the contractor sublets any part of this contract work to that subcontractor.

While Washington’s Industrial Insurance Act does not contain a similar provision creating such a statutory employee relationship, it does consider certain independent contractors as employees under certain circumstances even where there is no traditional employment relationship. In Massey v. Tube Art Display, Inc., 15 Wash.App. 782, 786-87, 551 P.2d 1387, 1390 (1976), the Washington Court of Appeals identified ten factors, found in section 220(2) of the Restatement (Second) of Agency, for determining the status of a worker as either an employee or an independent contractor: (a) the extent of control which, by the agreement, the master may exercise over the details of the work, (b) whether or not the one employed is engaged in a distinct occupation or business, (c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision, (d) the skill required in the particular occupation, (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work, (f) the length of time for which the person is employed, (g) the method of payment, whether by time or by the job, (h) whether the work is part of a regular business of the employer, (i) whether or not the parties believe they are creating the relation of master and servant, and (j) whether the principal is or is not in business. The Massey court also stated that all of the factors are of varying importance in determining the relationship and, with the exception of the element of control, not all the elements need be present. Id., at 787. This is because it is the right to control another’s physical conduct that is the essential and oftentimes decisive factor. Id.

Consequently, even though Washington workers compensation law does not automatically deem workers of a subcontractor to be employees of the general contractor for purposes of worker’s compensation, it follows that insurers in Washington may be able to ultimately deny its defense obligation (following a court determination in a declaratory judgment suit) in the event that it can show that an injured subcontractor was an employee of the general contractor under the Massey test. See St. Paul Reinsurance Co., Ltd. v. Baldwin, 503 F.Supp.2d 1255 (D.S.D March 22, 2007) (court applied similar test finding that party was employee and exclusion applied). We note that Judge Robart used this Massey test in determining whether a real estate sign installer qualified as an insured an “employee” of the named insured so this appears to be the test a Washington court analyzing an employer liability exclusion would use. Hartford Fire Ins. Co. v. Leahy, 774 F.Supp.2d 1104 (W.D. Wash. March 1, 2011).

While this broader interpretation of the exclusion may not be appropriate in all situations, it looks to be a useful tool for insurers to limit their exposure in worksite accident situations where the injured party subcontractor’s work was controlled by the general contractor, thus potentially making him or her an “employee” thereof for purposes of the liability exclusion.